ISSN 18310834 EUROPEAN COURT OF AUDITORS EN 2011 Special Report No 4 THE AUDIT OF THE SME GUARANTEE FACILITY THE AUDIT OF THE SME GUARANTEE FACILITY Special Report No 4 2011 (pursuant to Article 287(4), second subparagraph, TFEU) EUROPEAN COURT OF AUDITORS Special Report No 4/2011 – The audit of the SME Guarantee facility EUROPEAN COURT OF AUDITORS 12, rue Alcide De Gasperi 1615 Luxembourg LUXEMBOURG Tel. +352 4398-1 Fax +352 4398-46410 e-mail: euraud@eca.europa.eu Internet: http://www.eca.europa.eu Special Report No 4 2011 A great deal of additional information on the European Union is available on the Internet. It can be accessed through the Europa server (http://europa.eu). Cataloguing data can be found at the end of this publication. Luxembourg: Publications Oce of the European Union, 2011 ISBN 978-92-9237-157-9 doi:10.2865/24926 © European Union, 2011 Reproduction is authorised provided the source is acknowledged. Printed in Luxembourg 3 Special Report No 4/2011 – The audit of the SME Guarantee facility CONTENTS Paragraph GLOSSARY IVII EXECUTIVE SUMMARY 111 INTRODUCTION 16 SMEs AND ACCESS TO FINANCE 711 THE MAIN FEATURES OF THE SMEG FACILITY 1214 AUDIT SCOPE AND APPROACH 1598 AUDIT FINDINGS 1527 DESIGN OF THE SMEG FACILITY 1619 THE SMEG FACILITY IS BASED ON A VALID IMPLICIT INTERVENTION LOGIC 2022 THE IMPACT ASSESSMENT HELPED TO DESIGN THE FACILITY; HOWEVER, IT CONTAINED LITTLE FACTUAL EVIDENCE IN SUPPORT OF THE FACILITY 2327 COMPARED TO MAP, THE OBJECTIVES ARE MORE PRECISE, BUT LACK CLARITY AND SPECIFIC TARGETS 2845 SETTING UP THE MANAGEMENT STRUCTURE OF THE SMEG FACILITY: DELEGATING THE DAYTODAY MANAGEMENT TO THE EIF 3133 DELAYS IN PLANNING THE SMEG FACILITY 3437 TO PRESERVE THE CONTINUITY OF THE SUPPORT A ‘RETROACTIVITY CLAUSE’ WAS INTRODUCED 3845 APPROPRIATE MANAGEMENT FRAMEWORK ESTABLISHED TO OPERATE THE SMEG FACILITY 4655 SELECTION OF FINANCIAL INTERMEDIARIES 4750 WELLDESIGNED SELECTION FRAMEWORK 5153 INSUFFICIENT RECORDS JUSTIFYING THE AGREEMENT PARAMETERS 5455 POLICY OBJECTIVES NOT FULLY DEFINED IN THE GUARANTEE AGREEMENTS 4 Special Report No 4/2011 – The audit of the SME Guarantee facility Special Report No 4/2011 – The audit of the SME Guarantee facility 5672 PERFORMANCE MONITORING AND REPORTING 5968 PERFORMANCE INDICATORS WERE ESTABLISHED, BUT SHOULD BE MORE STABLE AND BALANCED 6972 REPORTING REQUIREMENTS ARE CLEAR AND REASONABLE AND ONLY SOME FINANCIAL INTERMEDIARIES CONSIDER THEM AS A BURDEN 7398 ACHIEVEMENTS OF THE SMEG FACILITY 7487 OUTPUTS OF THE SMEG FACILITY 8898 EUROPEAN ADDED VALUE 99104 CONCLUSIONS AND RECOMMENDATIONS ANNEX I OVERVIEW OF THE CIP STRUCTURE DOWN TO THE SME GUARANTEE FACILITY ANNEX II MONITORING BY THE COMMISSION AND THE EIF ANNEX III REPORTING BY THE FINANCIAL INTERMEDIARIES TO THE EIF REPLY OF THE COMMISSION Special Report No 4/2011 – The audit of the SME Guarantee facility 5 Special Report No 4/2011 – The audit of the SME Guarantee facility Additionality: The EU SME Guarantee facility is intended to provide additional access to finance for SMEs and not to substitute for state spending. Additionality will typically occur if lending volumes increase when compared to a scenario without EU intervention. CIP: The Competitiveness and Innovation Framework Programme was established by Decision No1639/2006/EC of the European Parliament and of the Council covering the period 2007–13. It is a programme launched by DG ENTR and DG ECFIN, managed by the EIF under the supervision of DG ECFIN to foster entrepreneurship and innovation of EU SMEs. CIP Decision: Decision No 1639/2006/EC of the European Parliament and of the Council of 24 October 2006 establishing a Competitiveness and Innovation Framework Programme (2007 to 2013) DG ECFIN: Directorate-General for Economic and Financial Affairs at the Commission DG ENTR: Directorate-General for Enterprise and Industry at the Commission EIB: European Investment Bank EIF: The European Investment Fund has been set up by the EIB to structure and grant specialised finan- cial products, including venture capital, guarantee instruments for SMEs and securitisation. The EIF works with a network of financial intermediaries, many of which are specialised in SME finance. In the context of the CIP, the EIF can be seen as the operational manager of the SME Guarantee facility. EIP: The Entrepreneurship and Innovation Programme is one of three pillars of the CIP framework to promote entrepreneurship and innovation. Ex ante impact assessment: Commission Staff Working Document, Annex to the Proposal for a Decision of the European Parliament and of the Council establishing a Competitiveness and Innovation Frame- work Programme (2007–2013), SEC(2005) 433. Financial instruments: The financial intermediaries participating in the SMEG facility can be public guarantee institutions, mutual guarantee organisations, micro-finance institutions and commercial or publicity owned or controlled banks. Financial intermediary: The financial intermediaries participating in the SMEG facility can be public guarantee institutions, mutual guarantee organisations, microfinance institutions and commercial or publicly owned or controlled banks. They may be direct lenders that provide loans to SMEs, or indirect guarantee organisations that either co-guarantee or counter-guarantee a loan portfolio, of one or sev- eral direct lenders. FMA: Fiduciary and Management Agreement of 20 September 2007 between the European Community and the EIF for the SMEG facility under the Competitiveness and Innovation Framework Programme (2007–13). G&E: The Growth and Employment initiative established by Council Decision 347/1998/EC covering the period 1998–2000. The successor programme of G&E is the MAP. Guarantee cap amount: The guarantee cap amount refers to the maximum amount of losses for which the EIF is liable under an EU guarantee. GLOSSARY 6 Special Report No 4/2011 – The audit of the SME Guarantee facility Special Report No 4/2011 – The audit of the SME Guarantee facility Guarantee cap rate: The guarantee cap rate is a pre-agreed rate at which the EIF’s liability is capped under a guarantee agreement. The amount of the EIF’s liability under a guarantee agreement (guarantee cap amount) can be calculated by multiplying the actual portfolio volume by the guarantee rate and the guarantee cap rate. For example, portfolio volume = 1000; guarantee rate = 50 %; guarantee cap rate = 10 %. Thus, maxi- mum EIF liability (guarantee cap amount) = 1000 x 50 % x 10 % = 50. Guarantee deal: Guarantee deals are the individual guarantee agreements between the EIF and a finan- cial intermediary covering the activities performed on the basis of these agreements. Impact: Longer-term socioeconomic consequences that can be observed after the completion of an intervention, which may affect either direct or indirect addressees of the intervention. Implementation report: The CIP Council decision stipulates that the Commission should draw up an annual implementation report for the framework programme and for each specific programme, examin- ing the supported activities in terms of financial implementation, results and, where possible, impact. The Commission should communicate the annual implementation reports to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions. Input: Financial, human and material resources that are mobilised for the implementation of an inter- vention. Lisbon strategy: During the meeting of the European Council in Lisbon (March 2000), the Heads of State or Government launched a ‘Lisbon strategy’ aimed at making the European Union the most competitive economy in the world and achieving full employment by 2010. MAP: The Multi-Annual Programme for Enterprise and Entrepreneurship covering the period 2001–06 is an SME programme of DG ENTR managed by the EIF under the supervision of DG ECFIN. It was the predecessor programme of the CIP. Maximum portfolio amount: The maximum portfolio amount is the maximum loan volume which may be covered by the EU guarantee. It is established by the EIF for each financial intermediary, taking into account various considerations such as the available EU budget and comparable past lending volumes. OECD: Organisation for Economic Cooperation and Development Outcome: Change that arises from the implementation of an intervention and which normally relates to the objectives of this intervention. Outcomes include results and impacts. Outcomes may be expected or unexpected, positive or negative. Output: What is produced or accomplished with the resources allocated to an intervention. Reference volume: Reference volume represents the amount of guarantees or financing which the inter- mediary could reasonably be expected to achieve in the absence of the EU guarantee. Result: Immediate changes that arise for direct addressees at the end of their participation in an inter- vention. Special Report No 4/2011 – The audit of the SME Guarantee facility 7 Special Report No 4/2011 – The audit of the SME Guarantee facility SME: Small and medium-sized enterprise. As per the Commission recommendation of 6 May 2003 con- cerning the definition of micro, small and medium-sized enterprises, SMEs are defined as enterprises which employ fewer than 250 employees, which have an annual turnover not exceeding 50 million euro, and/or an annual balance sheet total not exceeding 43 million euro and which conform to the criterion of being an autonomous enterprise. SMEG facility: SME Guarantee facility: a financial instrument managed by the EIF, providing guarantees or counter guarantees to financial intermediaries for loans granted by financial institutions to SMEs aim- ing at increasing the SMEs’ debt financing supply. SMEG windows: The four windows of the SMEG facility are: • debt financing via loans or leasing, • microcredit financing, • guarantees for equity or quasi-equity investments in SMEs, and • securitisation of SME debt finance portfolios. 8 Special Report No 4/2011 – The audit of the SME Guarantee facility Special Report No 4/2011 – The audit of the SME Guarantee facility EXECUTIVE SUMMARY I. T h e S M E G u ar a n te e (SM E G) f ac i li t y i s a financial instrument managed by the Euro- p e a n I nve s tme n t Fund o n b e hal f o f the European Commission and providing guar- antees or counter g uarantees to financ ial intermediaries for loans granted by finan- cial institutions to SMEs aimed at increas - ing the supply of debt financing. II. The ob j ective of th e Court ’s aud it was to assess the effectiveness of the SMEG facil- ity, not ably th e design and plannin g, the m a n a ge m e n t o f its op e ra t i o ns an d t he achievement of its objectives. III. The Court found that the objectives of the current SMEG facility are more precise than under the predecessor pro g r a m m e s, but they are only specific, measurable, achiev- able and timed in relation to the expected ou t p u ts. Th e inter vention logic was not made ex p l i cit and li m i ted quant i f i cation of poten tial impac t s wa s p rovid ed a t t h e planning stage of the facility. [...]... s i o n , which then uses these repor ts for the annual implementation re por ts on the EIP and on the CIP Special Report No 4/2011 – The audit of the SME Guarantee facility 31 5 8 T h e Cour t examined the following aspects of per formance m onitor ing and repor ting: 42 ‘Evaluation of the indicators of the EIP’, February 2010 ο ο whether the Commission established a balanced set of per formance... Decision, Article 10 The objec tives are relevant, but they are only specific, stated in a measurable format and timed as regards the expected outp uts of the facilit y The quantified target of reaching 315 750 S MEs seems to be reasonably achievable (see paragraph 77) Special Report No 4/2011 – The audit of the SME Guarantee facility 20 2 6 Compared to the MAP, the objec tives of the SMEG facility were... undertaking by the originating institutions to grant a significant part of the liquidity resulting from the mobilised capital for new SME lending in a reasonable period of time Special Report No 4/2011 – The audit of the SME Guarantee facility 21 27 The CIP impact assessment sets an output target for the number of SMEs expected to benefit within the seven-year programme horizon Targets in terms of results... EIF 1st guarantee agreement between the EIF and a FI Special Report No 4/2011 – The audit of the SME Guarantee facility 23 33 The average period from the receipt of the CIP application from an intermediar y up to the signature of the agreement was n ear ly 11 months 3 1 M oreover, the timeframe for the applica t i on process was considered to be unreasonable by eight out of 21 respondents to the Cour... propositions The SMEG facilit y seeks to remedy this situation by providing g uarantees in cases where the SMEs are unable to do so Special Report No 4/2011 – The audit of the SME Guarantee facility 18 1 9 Never theless, in the absence of an explicit inter vention logic, it is difficult to understand the rationale of some specific ele ments of the SMEG facilit y, such as targeting innovative SMEs b y... invited the intermediaries to answer 48 questions on topics such as: (i) the SMEG application process; (ii) the EIF’s management during the lifetime of the guarantee; (iii), the guaranteed product; and (iv) the impact of the financial crisis on the products In addition, the intermediaries that participated under the MAP but not the CIP were asked to indicate the reasons 16 Comments from both the EIF... and provides Partner bank pays guarantee calls FI grants loans repay loans repay loans grants loans SME s guarantee calls if loan defaults pays guarantee calls provides guarantee guarantee calls if loan defaults co-guarantees (or) guarantees SMEs Source: European Court of Auditors Special Report No 4/2011 – The audit of the SME Guarantee facility 14 9 T he EIF provides guarantees to financial intermediaries... improve their lending capacity and, therefore, the availabili t y and ter ms of loans towards SMEs The EIF signs guarantee agreements in its own name, on behalf of the Commission and at the r isk and cost of the Union budget I n order to allow the Commission to monitor the facility, the EIF repor ts to DG ECFIN o n the progress achieved on a quar ter ly basis 10 A co -guarantee provides a second guarantee. .. addition to the main guarantee to the lender, whereas a counterguarantee guarantees part of the first guarantor’s guarantee 11 Guarantee deals’ are the individual guarantee agreements 1 0 The financial intermediaries par ticipating in the SMEG facilit y are public guarantee institutions, mutual guarantee organisa tions, microfinance institutions and commercial or publicly owned or controlled banks They... e E IF a nd the Commission and the agreement signed between the EIF and the financial inter mediar y were examined; Special Report No 4/2011 – The audit of the SME Guarantee facility 16 ο ο s e l e c t i o n o f a s a m p l e o f 1 8 1 l o a n s f ro m t h e n i n e f i n a n c i a l intermediaries visited in order to assess that the use of the guaranteed SME loans was in line with the SMEG objec tives . – The audit of the SME Guarantee facility 15 Special Report No 4/2011 – The audit of the SME Guarantee facility 12. The objective of the Court’s audit was to assess the effective - ness o f the. an EU guarantee. GLOSSARY 6 Special Report No 4/2011 – The audit of the SME Guarantee facility Special Report No 4/2011 – The audit of the SME Guarantee facility Guarantee cap rate: The guarantee. COMMISSION Special Report No 4/2011 – The audit of the SME Guarantee facility 5 Special Report No 4/2011 – The audit of the SME Guarantee facility Additionality: The EU SME Guarantee facility is intended to